: Inflation and war disruption will challenge private equity in 2022 after a record-breaking year

Spikes in food and energy prices after the Russian invasion of Ukraine and steeper capital costs will challenge private equity as an asset class in 2022 after a record-setting 2021, Bain & Co. said in its annual global private equity report.

“It’s clear that companies across the economy are scrambling to push through long-deferred price increases they will be reluctant to reverse,” said the firm in the 84-page report on the private equity landscape.

The report highlighted the economic shockwaves of the Ukraine war.

“While the macro impacts of the war are impossible to gauge, it is likely the disruption will maintain upward pressure on prices, while creating a massive humanitarian crisis that is shaking Europe and (the) world,” the report said.

Private equity dealmakers that were helped by higher prices for companies in recent years now face the risk of flatter valuations, while inflationary cost pressures pose a threat to nearly all portfolio companies, the report said.

The flow of cheap capital is being reduced by political tensions, demographic trends, and a retreat from globalization.

“There are plenty of signs that geopolitics and national security concerns may become impediments to global capital inflows,” the report said.

These factors may make it “significantly more challenging” in the years ahead for private equity firms to deliver returns that their investors have been accustomed to receiving, the report said.

“In an era of inflation, top-tier returns will inevitably depend on nuts-and-bolts value creation, helping improve a portfolio company’s ability to generate more revenue,” the report said.

Looking back at 2021, Bain & Co. reported $1.1 trillion in buyouts, double 2020’s total of $577 billion and well ahead of the previous record of $804 billion from 2006.

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The number of individual deals grew to nearly 4,300 in 2021, up 16% from 2020. The amount of capital held for deals – so-called dry powder – increased to $3.4 trillion by the end of 2021, up from $3.1 trillion at the end of 2020.  

The combined value of take-private deals jumped to $469 billion in 2021 from $298 billion in 2020.

Some of 2021’s mega deals included the $30 billion-plus investment in Medline Industries by Blackstone Group
Carlyle Group
Hellman & Friedman, and GIC.

Buyout funds sold $957 billion in assets in 2021, more than double the level from 2020. Special purpose acquisition company deals increased 325% from 2020 and hit $158 billion in deal volume.

The years-long trends of higher deal prices, cheap credit, and rising interest in the asset class from institutional investors were mostly repeated in 2021.

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